Pay Gaps in Frictional Labour Markets: ∗ Chris Bidner

Pay Gaps in Frictional Labour Markets:
Theory and Evidence on the Gender Gap from U.S. Cities
Chris Bidner†and Ben Sand‡
February 4, 2016
We empirically evaluate an imperfectly competitive model of the
labour market in which pay gaps arise between equally productive
workers as a consequence of differences in outside options. We use
the model to quantify a workers’ outside options, to derive the key
estimating equation, to elucidate sources of potential endogeneity, as
well as to provide guidance on how to address such threats. We focus
the analysis on the gender pay gap, employing a city-level analysis
using U.S. census data for the 1970-2007 period. We find considerable
support for the model: the key coefficient is correct-signed, of a reasonable magnitude, and significant in virtually all specifications. We
can account for 30-50% of the gender gap that remains after controlling for observed demographic, productive, occupation and industry
characteristics and can we explain 10-40% of the variation in this gap
across cities. The relatively rapid decline in the gap during the 1980s
disappears once gender differences in outside options are taken into
Previously circulated as “Industrial structure and the gender gap: Evidence from U.S.
cities”. We are grateful for helpful comments received from seminar participants at the
University of Adelaide, UC Berkeley, the University of New South Wales, the University
of British Columbia, the University of Toronto, UC Merced, and from discussions with
Paul Beaudry, David Card, Kevin Lang, Thomas Lemieux, Enrico Moretti, and Krishna
Pendakur. All errors are our own.
Department of Economics, Simon Fraser University. [email protected]
Department of Economics, York University. [email protected]